The second of Stephen Covey's famous Seven Habits of Highly Effective People urges us to "Begin with the End in Mind". He goes on to explain that "to begin with the end in mind means to start with a clear understanding of your destination. It means to know where you're going so that you better understand where you are now so that the steps you take are always in the right direction".

The same applies with your business. It may seem strange that the key to taking your business forward is planning your exit. The point is this: if you understand exactly what you want out of your business, to the point where you can envisage your exit, the road to achieving this vision becomes much straighter and smoother.

Businesses can be run in many different ways, often with no clear idea from their shareholders what it is they want to achieve. Most businesses will drift along paying salaries, trading with customers, paying suppliers, arguing with the bank, among many other day to day activities. To quote Stephen Covey again, "it's incredibly easy to get caught up in an activity, in the busy-ness of life, to work harder and harder and climbing the ladder of success only to discover it is leaning against the wrong wall. It is possible to be busy - very busy - without being very effective".

As Alice learned from the Cheshire Cat, if you don't know where you're going, it doesn't matter which way you should go. However, if you make firm decisions about your destination, you are able to focus your energies and your business in the most appropriate way.


Lifestyle vs. Asset generation

The first decision you must make is whether you view your business as a vehicle for income generation or as an asset for future harvesting. The first will find you running your business until your retirement, drawing a salary, optimising your tax position and using your business for certain personal expenses. The second will see you focusing on growing the asset value of the business, building a strong balance sheet, and positioning the business for optimum value at the time you dispose of it.


Legal entity

Your next decision will relate to the vehicle that you use for your business. Should you use a sole proprietorship, a partnership, a close corporation, or a company? The most appropriate vehicle will depend on your first decision regarding the style of your business along with other factors such as potential risks to the business and yourself and whether you are alone in your business or have partners.

If you have partners, we always suggest using a company. A partnership is very dangerous because you may find yourself personally liable for all the debts of the partnership even if one of your partners acted without your authority or even knowledge. If you are not alone, a close corporation is no better.

While a company requires more rigour and costs more to establish and run, we believe that the disciplines required are good for addressing many of the causes of business failure. Your personal assets are also far better protected with a company than a close corporation.


Protect your interests

In addition to setting up the vehicle itself, you must make sure that your interests are well protected by way of the necessary agreements before you start. Assuming that you have partners, the most important documents is the shareholders' or partnership agreement. There is is a saying that "the more you say now, the less there is to debate later". It should cover all aspects the business and the partners' relationship with each other. Other important elements cover protection of the intellectual capital of the business, including patents, trademarks and copyrights.


Protect your assets

You should also make sure that your personal and business assets are legally separated from the business and protected should the business fail. You must investigate setting up separate trusts for your personal assets, your shares in the business and the assets of the business. This is a vital area, which is very seldom given sufficient thought. It is well worthwhile seeking professional advice in this area.


Ongoing management

Once you are established, you need to put in management controls and systems to best to give effect to your overall strategy. These are the subjects of another article. If your decision is to build your business as an asset for a sale later on, our best advice is to put yourself right now in the shoes of a potential purchaser. Think about what you would look for in buying a business as a going concern.


Entrepreneurship is not about taking risk, but managing risk

Starting and managing your own business carries more risk than is normally acknowledged. The risks are not only that the business will not succeed, but also that you could lose everything you own. Reducing these risks is an exercise that requires not only with a 100 percent effort and enthusiasm, but serious planning and foresight before you make any commitments.

Andrew McGregor is a director of the business PLAN. He can be contacted at adml@tbp.co.za or (011) 782 6746.

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